Wave of optimism heralds a return to worldwide growth

Author: By Sean O’Grady, Economics Editor

The IMF’s chief economist, Olivier Blanchard, was also bullish, saying: “The recovery has started. Sustaining it will require delicate rebalancing acts, both within and across countries”, though there are “deep scars” that would take years to heal. And, while warning that the recovery has only arrived thanks to a “gusher of federal money”, the legendary investor Warren Buffett agreed that “the United States economy is now out of the emergency room and appears to be on a slow path to recovery”.

The OECD said that GDP in the organisation’s area stabilised between April and June, with only the tiniest contraction ? 0.002 per cent, a sum normally lost in rounding. Across the world’s seven largest advanced economies, Japan now leads the way, with a 0.9 per cent GDP rebound. Last week Eurostat said that France and Germany both grew by 0.3 per cent over the second quarter. Italy and the US, as well as smaller economies such as Spain and the Netherlands, are still in negative territory, though there is a widespread belief among economists that Britain and America will recover during this autumn. The G7 economies shrank by just 0.1 per cent.

These optimistic noises come as separate surveys from the Bank of England and the CBI indicated that the UK has almost certainly seen the worst of the recession, and may soon return to growth. The CBI’s industrial trends survey was the least negative since June 2008.

Richard Lambert, the CBI’s director-general, said: “Manufacturers are facing weak demand at home and abroad, and their order books continue to look anaemic. More positively, it looks like destocking in the manufacturing sector may be coming to an end, which offers a further sign that the UK economy is starting to stabilise.”

The Bank’s regional agents’ survey said that consumer spending had continued to stabilise, the recovery in housing market activity had continued, but investment intentions remained depressed.

The minutes of last week’s meeting of the Bank’s Monetary Policy Committee were published yesterday, indicating that the Governor, Mervyn King, and two others members, Tim Besley and David Miles, had been outvoted on expanding the Bank’s programme of quantitative easing. They had wanted to increase the scheme by £75bn to £200bn, rather than the £50bn rise eventually agreed. They argued: “The potential adverse consequences of adding another large monetary stimulus might be less severe than the possible costs of acting too cautiously. Insufficiently stimulatory monetary policy would cause inflation to remain below the target for a sustained period of time, depressing inflation expectations, and might harm public confidence in the recovery, causing it to falter.”

Whatever optimistic signs may be emerging globally, economists said that the minutes showed the Bank was not going to “take any risks”.

George Buckley, the chief UK economist at Deutsche Bank, said: “This is the third time Mervyn King has been outvoted since becoming Governor in 2003, and the first time that he has voted more dovishly than the actual decision since the Bank became independent in 1997. The MPC is clearly unwilling to take any risks with the recovery; their reaction function appears to be more dovish than we had initially thought.”

David Kern, chief economist at the British Chambers of Commerce, added: “In view of the dangers facing businesses, the MPC should reject suggestions to reduce or suspend quantitative easing” in the light of higher-than-expected inflation figures this week.

Many observers fear that having ended the “destocking process”, growth will stall as consumers continue to restrain their spending and they and governments begin to pay off their high levels of debt.

“I think we’re OK for the next six months,” the former US Federal Reserve chairman Alan Greenspan told the news agency Reuters in an interview. “We are getting a recovery in [housing] starts and motor vehicles, but the process doesn’t have legs to it.”

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